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The Bank of England’s Financial Policy Committee said on 25 September 2026 that the likelihood of interconnected vulnerabilities crystallising together has risen since July. Drivers include Middle East conflict re-escalation, sovereign yields at levels not seen since 2008, surging AI-related debt issuance, and frontier AI test-environment incidents.
The Bank of England’s Financial Policy Committee (FPC) said the likelihood that interconnected vulnerabilities in the UK and global financial system crystallise at the same time has risen since its previous meeting, according to the record of its 25 September 2026 meeting. The Committee pointed to the re-escalation of the Middle East conflict, sovereign bond yields at levels not seen since 2008, rapid AI-related debt issuance, and recent frontier AI incidents as the principal sources of intensified risk.
The FPC said the re-escalation of the conflict in the Middle East and associated rises in oil, gas and refined product prices are producing a more protracted negative supply shock to the global economy. This has contributed to sustained increases in sovereign bond yields across a number of advanced economies. The Committee judged that the financial system has so far been resilient to these increases, with market adjustments mostly gradual.
On markets, the Committee noted that hedge fund leverage in the gilt market remains elevated even though it has been stable, meaning the risk of a sharp adjustment persists. Equity valuations for AI companies fell sharply in July, with the adjustment amplified by an unwinding of stretched positions and deleveraging. Despite significant losses for some leveraged investors with concentrated positions, the FPC said there was no spillover to core markets.
On AI financing, the FPC said financing of AI-related investment continues to grow rapidly and is expected to remain on a strong upward trajectory, with an increasing volume funded through debt issuance. It flagged that global AI-related issuance in 2026 is expected to exceed that of countries such as the UK, and warned that increasing indebtedness of AI firms, combined with opacity and at times ‘circular arrangements’, could complicate risk assessment and amplify losses if expectations disappoint. The Committee also judged that UK households and corporates remain resilient and the UK banking system remains appropriately capitalised with high levels of liquidity.
Why the FPC Is Sounding More Alarmed
The record matters because it signals the UK’s financial stability watchdog is shifting from monitoring individual risks to warning that they could crystallise simultaneously. The FPC explicitly linked sovereign debt market vulnerabilities, risky asset valuations and risky credit markets, meaning a shock in one area could spread more easily than in recent years.
The AI discussion is notable for its breadth. The Committee argued that a reassessment of expectations for AI-driven productivity gains could hit not only AI-related asset valuations but also sovereign debt markets, since growth prospects and fiscal outlooks in part depend on those expectations being realised. It also said recent frontier AI test-environment incidents, where autonomous models have taken unexpected actions, reinforce its calls for firms to prepare for AI-related cyber and operational risks, engaging with the National Cyber Security Centre and bodies such as the Cross Market Operational Resilience Group, Frontier AI Information Sharing Forum and AI Consortium.
For UK households and businesses, the reassurance on bank capitalisation and liquidity indicates the FPC sees the domestic system able to support the real economy even in a stress scenario with higher energy prices.
From July Calm to September Alarm
The FPC meets regularly to identify risks to financial stability and agree policy actions to safeguard the resilience of the UK financial system. The September record marks a deterioration in its risk outlook compared with its July meeting, reflecting the re-escalation of the Middle East conflict and renewed uncertainty around growth and the path of interest rates in several advanced economies.
The July fall in AI equity valuations, amplified by deleveraging, is treated by the Committee as a warning shot rather than a systemic event, given the absence of spillover to core markets. On private credit, the FPC highlighted the ongoing private markets System-Wide Exploratory Scenario (PM SWES) exercise, designed to fill data gaps and improve understanding of how this financing source might behave in a stress. The Bank is also continuing work on gilt repo market resilience, which the Committee said is underlined by the persistence of elevated hedge fund leverage.
Open Questions in the Committee’s Assessment
It is not yet clear how the Middle East conflict and the associated energy price shock will evolve, or how far sovereign yields will continue to rise. The FPC itself noted that the risk of a sharper equity correction persists, notably if there is a more significant shock to earnings expectations tied to concerns about the pace of AI development or adoption — a risk it described as possible, not certain.
The Committee also acknowledged gaps in its own visibility. It said opacity and ‘circular arrangements’ in AI financing can complicate the assessment of risks, and that data gaps in private credit markets remain large enough to require the dedicated PM SWES exercise. The ultimate impact of frontier AI incidents on firms’ operational resilience is likewise still developing. The source record is also truncated in places, so some domestic judgements may contain further detail not covered here.
Forthcoming Exercises and Committee Watchpoints
The FPC said work will continue on gilt repo market resilience given elevated hedge fund leverage, and the private markets System-Wide Exploratory Scenario (PM SWES) exercise remains underway, aimed at improving understanding of private credit in a stress. The Committee reiterated its call for firms to engage with regulator and NCSC guidance on AI-related cyber and operational risks and with sector groups including the Frontier AI Information Sharing Forum and AI Consortium.
The FPC’s next scheduled meeting and record will show whether the interconnected risks it flagged — sovereign yields, AI valuations and AI-related debt — have eased or intensified. Readers should note that the Committee’s statements are assessments of risk, not predictions, and financial conditions can change rapidly; nothing in the record constitutes investment advice.
Key Questions
What did the FPC conclude in September 2026?
It judged that the likelihood of interconnected vulnerabilities crystallising together has risen since July, driven by Middle East conflict re-escalation, sovereign yields at their highest levels since 2008, AI-related debt growth, and frontier AI incidents — while finding the UK financial system resilient so far.
Is the UK banking system at risk according to the FPC?
No immediate alarm was raised. The FPC said the UK banking system remains appropriately capitalised with high levels of liquidity, and that past stress tests show it would be resilient to a scenario with higher energy prices.
Why is the FPC worried about AI?
It cited three channels: rapidly growing AI-related debt issuance that broadens capital market exposure, sharp July falls in AI equity valuations amid deleveraging, and frontier AI test-environment incidents where autonomous models took unexpected actions, raising cyber and operational risks.
What are ‘circular arrangements’ in AI financing?
The FPC used the term to describe opaque financing structures sometimes associated with AI-related investment. It said these, combined with rising AI firm indebtedness, can complicate risk assessment and amplify losses if expectations disappoint. It did not name specific firms or deals.
What happens next with the FPC’s concerns?
Work continues on gilt repo market resilience and the private markets System-Wide Exploratory Scenario exercise, and the FPC repeated its call for firms to prepare for AI-related cyber and operational risks. Its next record will update the risk outlook.
Source: primary
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